New York high court dismisses case against bond insurer

[JURIST] The New York Court of Appeals [official website] on Tuesday dismissed [opinion] a lawsuit against bond insurance company MBIA [corporate website] alleging breach of contract brought by several of the world's largest financial institutions. The lawsuit challenged the break-up of MBIA into two separate lines of bond insurance. MBIA, historically the largest guarantee insurer of municipal bonds and other public entity securities, sought to separate its municipal bond obligations from its structured finance obligations, including mortgage-backed securities and collateralized debt obligations. Major financial institutions including JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, Merrill Lynch, Barclays, Wachovia, UBS, and HSBC [corporate websites] challenged the split on the contractual grounds, arguing that it amounted to a fraudulent conveyance and left the divided MBIA undercapitalized and unable to pay on the structured-finance product policies [CNBC report] written by MBIA. The court dismissed the lawsuit, concluding:

For their breach of contract claim, plaintiffs allege that MBIA Insurance breached an implied covenant of good faith and fair dealing in its insurance policies. Plaintiffs do not claim that MBIA Insurance has failed to make any payment due under the policies, but instead contend that the company has frustrated an implicit purpose of obtaining the policies, namely "to enhance the value and credit rating" of the covered structured finance products. However, since this alleged purpose is nowhere reflected in the policies, it cannot serve as the basis for a claim of breach of contract or breach of the implied covenant of good faith and fair dealing. ... In effect, plaintiffs seek an advisory opinion premised on future events that are beyond defendants' control and thus are speculative.

There are currently two other lawsuits challenging the split that have yet to be resolved.

About Paper Chase

Paper Chase is JURIST's real-time legal news service, powered by a team of 30 law student reporters and editors led by law professor Bernard Hibbitts at the University of Pittsburgh School of Law. As an educational service, Paper Chase is dedicated to presenting important legal news and materials rapidly, objectively and intelligibly in an accessible format.